Legal Articles

Insolvency is a term used to describe a situation where a person or company is unable to pay its debts as they become due. In South Africa, there are different types of insolvencies, each with its own unique characteristics and procedures. Understanding the different types of insolvencies is important for individuals and businesses who are struggling to meet their financial obligations, as it can help them choose the best course of action to address their financial difficulties. In this blog post, we will provide an overview of the different types of insolvencies in South Africa and the legal processes involved in each.

Different Types of Insolvencies in South Africa

The different types of insolvencies in South Africa are as follows:

• Business Rescue
• Liquidation (Voluntary and Compulsory)
• Sequestration (Voluntary and Compulsory)
• Debt Review

Each of these types of insolvencies has its own specific legal requirements and procedures, and the choice of which one to pursue will depend on the particular circumstances of the individual or business.

Business Rescue in South Africa Explained

Business rescue is a legal process in South Africa that is designed to help financially distressed companies recover and restructure their operations. The specific legal requirements and procedures for business rescue are outlined in Chapter 6 of the Companies Act of 2008. Here are the key requirements and procedures:

1. Initiation of Business Rescue: A company can initiate business rescue proceedings by passing a resolution to do so or by applying to the court for an order to commence business rescue.
2. Appointment of a Business Rescue Practitioner: Once business rescue proceedings are initiated, a business rescue practitioner (BRP) must be appointed. The BRP takes control of the company's affairs and develops a business rescue plan.
3. Business Rescue Plan: The BRP must develop a business rescue plan within 25 business days of their appointment. The plan sets out how the company's affairs will be restructured and how it will repay its debts.
4. Adoption of Business Rescue Plan: The business rescue plan must be adopted by the company's creditors and shareholders. If they do not approve the plan, the company may be placed into liquidation.
5. Implementation of Business Rescue Plan: Once the business rescue plan is adopted, the BRP must implement it. The plan may involve the sale of assets, the restructuring of debt, or other measures to restore the company's financial viability.
6. Termination of Business Rescue: Once the business rescue plan has been fully implemented, or if it becomes clear that it cannot be implemented successfully, the BRP must either end the business rescue proceedings or apply to the court to have the company placed into liquidation.

Liquidation Explained

Voluntary Liquidation

1. Resolution to Liquidate: A company can initiate voluntary liquidation proceedings by passing a resolution to do so.
2. Appointment of Liquidator: Once the resolution to liquidate has been passed, a liquidator must be appointed to wind up the company's affairs.
3. Notice to Creditors: The liquidator must notify the company's creditors of the liquidation and invite them to submit their claims.
4. Sale of Assets: The liquidator must sell the company's assets and use the proceeds to repay its creditors.
5. Distribution of Assets: Once all the company's assets have been sold and its creditors have been paid, any remaining funds are distributed to the company's shareholders.

Compulsory Liquidation

1. Application to Court: Compulsory liquidation proceedings are initiated by an application to the court, usually by a creditor of the company.
2. Provisional Liquidation: If the court finds that the company is insolvent, it may appoint a provisional liquidator to take control of the company's affairs while the liquidation application is being considered.
3. Liquidation Order: If the court grants the liquidation application, it will issue a liquidation order and appoint a liquidator to wind up the company's affairs.
4. Notice to Creditors: The liquidator must notify the company's creditors of the liquidation and invite them to submit their claims.
5. Sale of Assets: The liquidator must sell the company's assets and use the proceeds to repay its creditors.
6. Distribution of Assets: Once all the company's assets have been sold and its creditors have been paid, any remaining funds are distributed to the company's shareholders.

It is important to note that the liquidation process can be complex and time-consuming, and it is recommended that companies seek legal advice before initiating liquidation proceedings.

Sequestration Explained

Voluntary Sequestration

1. Application to Court: An individual can initiate voluntary sequestration proceedings by applying to the court.
2. Affidavit and Supporting Documents: The individual must provide an affidavit and supporting documents that demonstrate their inability to pay their debts.
3. Appointment of Trustee: Once the court grants the sequestration application, a trustee is appointed to administer the individual's estate.
4. Notice to Creditors: The trustee must notify the individual's creditors of the sequestration and invite them to submit their claims.
5. Sale of Assets: The trustee must sell the individual's assets and use the proceeds to repay their creditors.
6. Rehabilitation: Once the individual's debts have been repaid, they can apply for rehabilitation, which removes the sequestration order and restores their creditworthiness.

Compulsory Sequestration

1. Application to Court: Compulsory sequestration proceedings are initiated by an application to the court, usually by a creditor of the individual.
2. Affidavit and Supporting Documents: The creditor must provide an affidavit and supporting documents that demonstrate the individual's inability to pay their debts.
3. Provisional Sequestration: If the court finds that the individual is insolvent, it may issue a provisional sequestration order and appoint a trustee to take control of the individual's affairs while the sequestration application is being considered.
4. Sequestration Order: If the court grants the sequestration application, it will issue a sequestration order and appoint a trustee to administer the individual's estate.
5. Notice to Creditors: The trustee must notify the individual's creditors of the sequestration and invite them to submit their claims.
6. Sale of Assets: The trustee must sell the individual's assets and use the proceeds to repay their creditors.
7. Rehabilitation: Once the individual's debts have been repaid, they can apply for rehabilitation, which removes the sequestration order and restores their creditworthiness.

It is important to note that the sequestration process can be complex and time-consuming, and it is recommended that individuals seek legal advice before initiating sequestration proceedings.

Debt Review in South Africa

In South Africa, debt review is a legal process that allows over-indebted consumers to restructure their debts and make more affordable payments. Here are the specific legal requirements and procedures for debt review:

1. Application to Debt Counsellor: A consumer must apply to a registered debt counsellor for debt review.
2. Assessment of Debts: The debt counsellor assesses the consumer's debts, income, and expenses to determine if they are over-indebted.
3. Notification of Creditors: If the consumer is found to be over-indebted, the debt counsellor notifies the consumer's creditors and the credit bureaus that the consumer is under debt review.
4. Negotiation of Repayment Plan: The debt counsellor negotiates with the consumer's creditors to restructure their debts and develop a repayment plan that the consumer can afford.
5. Court Application: If the creditors do not agree to the repayment plan, the debt counsellor can apply to the court for a consent order, which makes the repayment plan legally binding.
6. Payment Distribution: The debt counsellor collects the consumer's monthly payments and distributes them to the creditors according to the repayment plan.
7. Completion of Debt Review: Once the consumer has paid off all their debts according to the repayment plan, the debt counsellor issues a clearance certificate, which removes the debt review flag on the consumer's credit record.

It is important to note that the debt review process can be complex and time-consuming, and it is recommended that consumers seek legal advice before initiating debt review proceedings. Additionally, it is important to only work with registered debt counsellors to ensure that the process is legitimate and effective.

Van Deventer & Van Deventer Incorporated - Attorneys in Cape Town and Johannesburg

Navigating the complexities of insolvency, liquidation, and debt review can be overwhelming for both individuals and businesses. At Van Deventer & Van Deventer Incorporated, we understand the challenges that come with financial distress and offer legal services to help our clients find solutions that work for them.

With offices in Cape Town and Johannesburg, our team of experienced attorneys provides personalized legal guidance and support throughout the insolvency, liquidation, and debt review processes. Contact us today to learn more about our legal services and how we can assist you in resolving your financial challenges.